When the markets are on fire, it's easy to forget about things like saving and retirement planning. All you want to do is celebrate and splurge! But great wealth comes from financial responsibility during both good times and bad. And believe it or not, there are some top financial moves to make when the economy is great.
The US economy celebrated its 10th year anniversary of a bull market in 2020. The economy was strong and investors were making lots of money until COVID-19 hit! Then everything went to hell. But thankfully the vaccine rollout started and the markets are back in 2021.
With the Fed now firmly on our side, investors have gained new confidence in taking on more risk in real state given a collapse in mortgage rates.
Here are nine top financial moves to make when the economy is doing great.
Top Financial Moves To Make When The Economy Is Great
1) Refinance your debt.
The first of nine top financial moves you should make during a bull market is to refinance. Rates have come up since the lows of 2020, but are still significantly lower than 2017-2019. Take advantage by refinancing your mortgage and your student loans if you have any.
My favorite online lending marketplace is Credible. Prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free.
I refinanced to a 7/1 ARM at 2.625% with all fees baked in plus a $500 credit. That was huge since the ARM was set to reset to 4.5% after 5 years.
2) Keep exposed to risk assets.
The second of my top financial moves to make in a strong economy is to stay exposed to risk assets. Stocks, bonds, and real estate are your friends in a declining interest rate environment. Lower interest rates make owning other assets with higher interest rates or potentially higher returns more attractive. Interest rates are likely to stay low for longer.
I can't tell you how much risk exposure you should have since everybody's risk-tolerance and financial situation is different. All I can say is that you need to quantify your risk tolerance and then invest accordingly.
The most logical risk asset for me to invest in is real estate because lower mortgage rates bring in more real estate demand.
I'm investing more in real estate crowdfunding through my favorite platform, Fundrise. They have the best vetting process and most comprehensive amount of commercial real estate deals in my opinion. Here's a look at Fundrise's historical returns since inception.
3) Demand a raise or job hop.
We're currently at around a 3.4% national unemployment rate in America. That's close to full employment. Now is the time to ask for a raise or hunt for the “perfect job” if you are not satisfied with your existing one.
The general rule of thumb is that you can get at least 20% more if you put yourself on the open market. Depending on performance and industry, after about three years on the job in a hot labor market, you could conceivably get 50% or more compensation.
Loyal employees tend to lose out the most. Don't be like me. I stayed at my old employer for 11 years and probably gave up more than $1 million in earnings as a result. At least the main positive about loyalty is that it increases your chances for negotiating a juicy severance if you ever want to move on.
Frequent job hoppers can rarely negotiate a severance. Therefore, if you know you want to retire early, try to find the last job you can and be great at it.
4) Take a nice long break.
Given it's currently an employee's market, now is the time to take a long vacation or a sabbatical. That's probably not one of the top financial moves you were expecting.
Yes, it's tough to get off the grid when so much money is to be made. But it may be now or never as it might be career suicide to take a sabbatical during a downturn. Because when you get back, your job might not be there!
If you plan to work for at least five more years, please take an extended vacation or sabbatical. Money is working the hardest for you in a bull market, so don't worry so much about trying to make even more money.
Not taking a sabbatical is one of my big regrets as an early retiree. I could have taken two sabbaticals for 1-3 months since I had been there for 11 years. It's a company benefit I should have taken advantage of.
5) Start enjoying the good life.
If you can't live it up when times are good, you certainly won't be able to live it up when times are bad. When times are bad, you'll want to save more and take on side hustles. The end result is that you never end up spending any of your money on living the good life.
During a bull market, you're making money way beyond your normal expected income (day job, side hustle income, passive income). In other words, bull market money feels like “free money” or “funny money.”
Your goal is to calculate how much funny money you've made each year from the bull market and proceed to spend some of it on yourself, your family, and your loved ones. You don't have to spend 100% of your bull market gains each year. However, you should try to allocate and spend at least 10% of the funny money living it up.
6) Aggressively speculate on potential homeruns.
During a bull market, bigger bubbles tend to form. If you can catch a bubble and ride it before it implodes, you could potentially make a lot of money. This is why aggressively speculating on potential homers is one of my top financial moves during a bull market.
I would set aside 10% of your cash flow (not existing investments) in search of the next great speculative investment. A speculative investment is usually an unproven product, doesn't have positive cash flow, and is something not mainstream.
You should expect to lose 100% of your 10% with the chance of making a 1,000%+ return. The likelihood of either happening is probably small. At the very least, you will learn more about investing in assets that are often overlooked.
It's absolutely fine to invest in index funds for the long term. The vast majority of your funds should be allocated towards a boring S&P 500 and bond index. You just have little chance of ever getting richer faster than the majority of the investing population.
If I hadn't invested $3,000 in VCSY in 2000, I wouldn't have been able to make a $120,000 down payment for my first SF property in 2003. If I hadn't bought my first property in 2003, I may not have had the courage to go all-in on a single family home in SF at the end of 2004, which ultimately sold for $1.24 million more than I bought it for 13 years later.
All you need is one lucky break to supercharge your wealth. But in order to get your lucky break you need to take extra risk with some of your funds.
7) See if you can get top dollar for your business.
Valuations tend to be at their highest during a bull market because expectations are so high for future earnings growth. If you believe expectations are higher than reality, then you should aggressively try and shop your business around to the highest bidder.
But to be able to shop your business around, you must first have your own business. Having a business is great because not only does it have a cash flow component, but it also has an equity component as well. To create next level wealth is all about growing the equity component.
Although the trailing 12-month P/E ratio doesn't look outrageous yet at 21.9X compared to the 14.75X median multiple, the Shiller P/E ratio is getting up there at 30X compared to the 15.75X median multiple. The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous 10 years.
8) Reinvent yourself.
In a bull market, qualifications and credentials are often overlooked because everybody is making so much money. It's only after people start losing money that folks start carefully reading the fine print and questioning the background of the person.
During the last bull market, I know one guy who wrote a book about how to get rich despite having recently graduated from college with hardly any money. He ended up getting rich partially because of his book. Brilliant!
Today, I know of 25-year-olds with zero financial backgrounds who are teaching people how to invest in the stock market and retire early. It's impressive how folks are soaking it up.
If you've ever wanted to make money as a charlatan, now is the time to take advantage. It doesn't matter if you're a failed political consultant trying to position yourself as a financial expert or a burned out doctor looking to teach people how to be entrepreneurs. If you fake it, chances are higher you will make it during a bull market.
Theranos is probably the best example of allowing charlatans to get rich if they were able to sell some shares during their $400 million in funding rounds.
9) Calculate your FIRE plans.
It's fun to calculate how much you'll have if the bull market lasts for X years. It's also very dangerous to extrapolate massive gains for a long period of time.
Your goal should be to come up with a financial independence number that will produce enough investment income so you never have to work again. Then you should create three scenarios (bear case, normal case, bull case) on how long it will take to achieve that FI number.
Once you have created your three FI scenarios, you will naturally start taking steps to get there. Too many people just wing it when it comes to their finances. Then they wake up 10 years from now wondering where all their money went.
In my case, my FI number keeps growing because of kids. But I believe I will be able to hit my investment income goal of $300,000 a year by the end of 2022 in a conservative scenario. I've created an entire saving and investing plan to make it happen.
Enjoy Life During Good And Bad Times
Things are obviously hard in 2020. However, the bad times never last forever. Hang on!
In the meantime, be wise and properly keep track of your money with a free app like Personal Capital. I've used them since 2012 and have seen my net worth skyrocket partly thanks to great oversight. Personal Capital is free and you can use them to x-ray your investment portfolios for excess fees, manage your cash flow, and track your retirement progress.
I also strongly believe the trend towards real estate crowdfunding will continue as location independent work continues and the migration away from expensive coastal cities continue. Fundrise is my favorite platform to hunt for potentially great heartland real estate deals.
